Remuneration entitlements of a registered bankruptcy trustee

1. Introduction

   1. The purpose of this practice direction is to outline the position of the Inspector-General in Bankruptcy in regard to the principles on which a private registered trustee in bankruptcy is entitled to draw remuneration, the different methods available and what constitutes reasonable remuneration.  This does not apply to the Official Trustee whose remuneration is determined pursuant to section 163 the Bankruptcy Act 1966 (“the Bankruptcy Act”) and Part 3 of the Bankruptcy (Fees and Remuneration) Determination 2015, and is detailed in Fees and charges.
   2. References to provisions relating to remuneration entitlements of trustees in this practice document have been updated to reflect amendments to the Bankruptcy Act introduced from 1 September 2017 by the Insolvency Law Reform Act 2016 (“the ILRA”).  However, despite the repeal of former sections 161B and 162 of the Bankruptcy Act by the ILRA, those sections (other than subsections 162(5A), (6) and (6A)) continue to apply in relation to remuneration for an estate of a bankrupt of a trustee appointed or who consented to act before 1 September 2017.^[1]
   3. Division 60 of the Insolvency Practice Schedule (Bankruptcy) (“the Schedule”; Schedule 2 of the Bankruptcy Act) and Division 60 of the Insolvency Practice Rules (Bankruptcy) 2016 (“the Rules”) set out the legislative framework for trustee remuneration.  This framework provides an entitlement for the trustee to be paid for necessary work properly performed in administering a regulated debtor’s estate.  However, this does not automatically entitle the trustee to be remunerated for every hour of work undertaken in an administration.
   4. Division 60 of the Schedule and the Rules, as well as the review of third party costs provisions in section 65-20 of the Rules, indicate that trustees are entitled to take remuneration and disbursements that are:
      • determined^[2] by creditors or committee of inspection^[3]
      • reasonable and necessary
      • incurred legally
      • supported by documentation.
   5. A trustee has no entitlement for remuneration other than prescribed by the Schedule or Rules.  There is no entitlement to be remunerated for work other than in their capacity as the trustee of a regulated debtor’s estate, nor for work undertaken illegally.

2. Determined by resolution

   1. Remuneration can be determined prospectively under sections 60-10 and 60-12 of the Schedule provided each person doing the work, their category and expertise and a relevant rate applicable to each person is identified by the trustee in the initial remuneration notice.^[4]
   2. Subsection 60-12(2) of the Schedule explicitly requires trustee remuneration to be capped, with the period to which it relates also being stated.  This provides greater clarity to creditors as to what the reasonable remuneration will be and flexibility to trustees in circumstances where the administration extends beyond the estimated period.

3. Remuneration based on percentage not time-cost

   1. While the Schedule and the Rules allow for remuneration on a percentage basis,^[5] it is rare for trustees to seek to be remunerated in this way.  However, there are circumstances where a percentage-based fee may well better reflect the results obtained and the value contributed by a trustee, particularly in low debt, high asset estates.

4. Trustee remuneration—amount claimable without approval

   1. Registered trustees are permitted to claim a certain amount of remuneration without requiring approval of creditors (or a committee of inspection).  The amount depends on the date when the administration^[6] commenced, and/or when the trustee was first appointed or consented to act in respect of the administration:
      • $1849^[7] (indexed) may be recovered from the estate (or the bankrupt if insufficient money in the estate) by trustees appointed or who consented to act before 1 September 2017 for an administration which commenced^[8] before 1 December 2010^[9]
      • $5000^[10] (not indexed) may be recovered from the estate by trustees appointed or who consented to act before 1 September 2017 for an administration which commenced^[11] on or after 1 December 2010, where remuneration otherwise payable is less than this amount^[12]
      • $5000* (indexed) may be recovered from the estate by trustees appointed or who consented to act on or after 1 September 2017 regardless of when the administration commenced,^[13] if their remuneration is not determined by creditors, a committee of inspection or the Inspector-General.
   2. These amounts are set out on the indexed amounts page on AFSA’s website.^[14]
   3. Former regulation 8.08 of the former Bankruptcy Regulations 1996, which allowed (in the absence of creditor approval) remuneration to be drawn at 85% of the scale of charges set out in Guide to Hourly Rates published by the Insolvency Practitioners Association of Australia,^[15] has no application to personal insolvency administrations that commenced on or after 1 December 2010.

5. Reasonable remuneration and costs

   1. A trustee plays a central role in the administration of estates under the Bankruptcy Act, Rules and Bankruptcy Regulations 2021 and is under a general duty to exercise the powers committed to him/her in such a fashion that the objects of the legislation, including those of equality between creditors and fairness to bankrupts and debtors are served.^[16]
   2. The minimum standard required is that the trustee shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt or debtor.^[17]

   3. Standards relating to remuneration

   4. The Standards contained in Division 42 of the Rules set out the following requirements applicable to registered trustees generally.

      42-60  Costs incurred to be necessary and reasonable

      In conducting an administration, a registered trustee must:

      (a)  incur only those costs that are necessary and reasonable; and

      (b)  before deciding whether it is appropriate to incur a cost, compare the amount of the cost likely to be incurred with the value and complexity of the administration.

      42-65  Rate for tasks undertaken by trustee’s staff

      (1)  This section applies if the remuneration of a registered trustee is worked out wholly or partly on a time‑cost basis.

      (2)  The registered trustee must ensure that time billed for a task undertaken in conducting an administration is charged at the appropriate rate for the level of staff who would be reasonably expected to undertake the task.

      42-70  Keeping proper records in relation to work done

      A registered trustee must ensure that proper records are kept that:

      (a)  adequately describe the nature of the work; and

      (b)  if the trustee’s remuneration is worked out wholly or partly on a time‑cost basis—provide evidence of the time spent on work done in conducting an administration.

   5. In the often-quoted Adsett case,^[18] the Full Bench of the Federal Court considered how the proper sum payable to a trustee was to be determined referring to the following principles:
      • a trustee must exercise judgment so as to save the estate unnecessary expenditure of money
      • the remuneration to which the trustee is entitled is to be just and proper or reasonable remuneration in all the circumstances for the work carried out by the trustee.  The right to payment is only lost for a specific reason as, for example, if no work was done or needed to be done or misconduct by the trustee
      • a trustee is entitled as of right to full indemnity out of the trust estate against all his/her costs, charges, and expenses properly incurred.  The words “properly incurred” mean reasonably as well as honestly incurred
      • trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness.
   6. Against this background it is the Inspector-General’s view that it is not reasonable to charge fees or costs relating to work undertaken by the trustee:
      • when litigating based on self-interest (but see below comments in relation to the Wenkart case)
      • when work undertaken is not in the capacity of trustee
      • in continuing to administer an estate that should have been finalised, particularly when a surplus of assets over debts has existed and the trustee has not had due regard to the wishes of the bankrupt
      • relating to an annual inspection by the Inspector-General’s delegates; in responding to an Inspector-General investigation into a complaint lodged pursuant to section 12 of the Bankruptcy Act unless the complaint is spurious; or relating to an investigation in contemplation of disciplinary action, such as show cause action under section 40-40 of the Schedule.
   7. Each of these points is discussed in more detail below.  There are other circumstances outlined in this document where the trustee has no entitlement to be remunerated as trustee.

   8. Litigation for self interest

   9. The Adsett test as to whether a trustee is entitled to remuneration in connection with litigation was “whether the expenditure was reasonably as well as honestly incurred”. This reflects the principle that trustees must not act recklessly in instigating litigation and that the costs of unnecessary litigation will be payable by the trustee personally and not from the estate.  The Court in that case also stated that, in the case of a small and easily dissipated fund, all litigation should be avoided unless the chance of success is such as to render it desirable in the interests of the estate that the necessary risk should be incurred.  Finally, the Court stated that, where the resources applied to litigation are extravagant, the expenses would not be regarded as proper and must be borne by the trustee personally.
   10. This view was further supported in the Swain case,^[19] where Wilcox J had to determine whether the trustee became involved in litigation on behalf of the estate or on behalf of himself.  Wilcox found that the action was of self-interest, particularly since the trustee was seeking retrospective approval by the Court of his decision to sell a property having previously overlooked the need for creditor approval, and therefore the trustee was personally liable for costs and not entitled to be remunerated from the estate.  This self-interest view was further supported in the two Doolan v Dare^[20] decisions in which the Court found that the trustee had acted improperly in borrowing money to pay out creditors in the hope of preventing her removal, as trustee, by creditors.

   11. However, in the Wenkart case,^[21] the Full Court found that a trustee was entitled to remuneration for defending successfully:

       in the face of sustained opposition from Dr Wenkart, the remuneration, costs, charges and expenses he had claimed at the time of the annulment … It is true, in a sense, that the litigation was undertaken by Mr Pantzer for his benefit, as the primary judge observed.  In the same sense, any litigation into which a trustee might be drawn concerning remuneration, disbursements and expenses is litigation for the trustee’s benefit.  But to characterise it this way does not necessarily answer the question whether the trustee (or former trustee) has been properly involved in the litigation as an incident of having acted as a trustee charged with the responsibility of administering the bankrupt’s estate.

   12. Other work not in the capacity of trustee

   13. In the Re Ide case,^[22] a receiver went to a rural property  The grazier appeared with a rifle, which he fired. The bullet ricocheted and struck the grazier’s sister, who later died.  The receiver spent some time assisting the police with their inquiries, which he later sought to bill to the receivership. The Court denied his claim for remuneration for this time.  At [58], Ferris J’s views in the Maxwell case^[23] received further airing:

       one does not indemnify the receiver for loss, one looks to the value of the work to the partnership.  In the present case the value of assisting the police with their enquiries to the partnership must be close to nil.

   14. At 59, Young CJ concluded that:

       >

       I think it is important to note that assisting police with any enquiry falls into a greater civic duty that surpasses all professional duties.  That the receivers’ representative was a witness to the shooting and unfortunate killing of Ms Fallon places on them a civic responsibility to ensure that justice is done by assisting police in any way they can, for the greater benefit of the community.

   15. When further action by the trustee is not warranted

   16. The Inspector-General’s expectation is that, where the bankrupt is solvent or has resources to pay out all the debts, the trustee should identify this early and give the bankrupt an opportunity to pay and take advantage of section 153A of the Bankruptcy Act before incurring any unnecessary expense, adopting a minimalist approach to the administration, safeguarding property and working with the bankrupt.
   17. In the Townsend case,^[24] the Court considered appropriate trustee remuneration in an annulment application.  The creditors had been paid and the bankrupt had attempted to pay the trustee’s remuneration relatively early in the administration.  The trustee had refused to give an annulment believing that the investigation of a complaint made by the bankrupt to the regulator and the possibility of her litigating would increase his remuneration.  He could therefore not say that all the debts were paid.
   18. In the primary decision, Coker FM considered that the fees were excessive because the trustee had failed “to bring this matter to a successful conclusion” and ruled the trustee was only entitled to remuneration and costs up to the point when he knew all creditors had been paid and the bankrupt had sought to pay his fees.  However, on appeal, the Court noted that AFSA had taxed the remuneration and costs of the trustee and held that those taxed costs were therefore reasonable.
   19. The Phillips case^[25] involved similar issues.  The bankrupt, shortly after being informed of his bankruptcy, sought to have his sequestration order set aside.  The trustee argued that orders annulling the bankruptcy were more appropriate, which would have entitled him to indemnity for his fees from the assets.  The trustee sought to be remunerated for over 50 hours of work, totalling more than $14,000, while the sole creditor’s debt was $4888.  The debt and the petitioning creditor’s costs had been paid shortly after the sequestration order was made.
   20. The Court raised concerns about the action taken by the trustee and expressed the view that the minimum fee the trustee could recover from the bankrupt pursuant to former section 161B of the Bankruptcy Act ($1388 at that time) was more representative of the work that should have been performed.  The Court also expressed the view that trustees should adopt a more cautionary approach in those cases where:
       • the sequestration order is made with respect to a relatively small debt
       • the sequestration order is made in the absence of the bankrupt
       • the debt is not incurred in the course of business or commercial dealings
       • the bankrupt appears to have a significant asset, such as a home.

6. Dealing with AFSA enforcement and Practitioner Surveillance

   1. Pursuant to section 12 of the Bankruptcy Act, the Inspector-General may inquire into or investigate the conduct of a bankruptcy trustee or administration.  The powers of the Inspector-General are delegated to officers in AFSA’s Enforcement and Practitioner Surveillance division.
   2. The trustee is required to provide a report on matters under inquiry or investigation by the Inspector-General, if requested, and the Inspector-General may require the production of any books kept by a trustee and require a trustee to answer any inquiries.
   3. Inquiries and investigations by the Inspector-General can take a number of forms.  This may include:
      •  an annual inspection of the trustee’s systems, practices and estates
      • an issue arising from the inspection
      • an enquiry following a complaint or tip-off received
      • an investigation that may lead to disciplinary action, such as show cause action under section 40-40 of the Schedule.

   4. For some time, the Inspector-General has taken issue with registered trustees charging the estate for time spent in corresponding with AFSA.  It has been the Inspector-General’s position that in the ordinary course the estate should not bear this cost.  This issue has been addressed in the ARITA Code of Professional Practice (“the ARITA Code”) where it states:

      A practitioner should not claim remuneration for time spent:

      -  communicating with regulators regarding complaints about the practitioner or the conduct of a particular administration, except where the complaint is spurious;

      -  on regulator surveillance, professional audits or inspection of files, or on peer reviews; or

      -  unsuccessfully defending a breach of the law or this Code.

   5. This practice imposes an obligation on AFSA to ensure that trustees are not put to unnecessary time and costs in responding to what might be considered spurious complaints.  It follows that AFSA, and not the trustee, should decide when this is the case.  If AFSA has completed an investigation of a complaint and a further complaint is made and it does not raise new issues, the onus is on AFSA to respond to the complainant without putting the trustee to further unnecessary expense.  In some circumstances, for example if a complainant is persistent and AFSA  is required to approach a trustee again in relation to the same issues, the complaint may be regarded as spurious and it may be appropriate for remuneration to be claimed from the estate.  In such cases, AFSA will advise the trustee.

7. Documentation required to be maintained

   1. The duties relating to record keeping are outlined in Trustees’ guidelines relating to handling money and keeping records.

   2. Section 42-70 of the Rules sets out the following requirement.

      42-70  Keeping proper records in relation to work done

      A registered trustee must ensure that proper records are kept that:

      (a)  adequately describe the nature of the work; and

      (b)  if the trustee’s remuneration is worked out wholly or partly on a time‑cost basis—provide evidence of the time spent on work done in conducting an administration.

   3. Trustees not able to verify their remuneration by reference to these records may be required to refund any related remuneration.^[26]

8. Payment of trustee’s remuneration by debtor or related third party

   1. An issue of concern in the administration of a regulated debtor’s estate is the appropriateness or otherwise of a trustee arranging with the debtor to be remunerated or indemnified by the debtor or related third party in return for consenting to act as trustee on a debtor’s petition bankruptcy.
   2. Some trustees have provided feedback suggesting that requesting surety or an up-front payment from the debtor or related third party is appropriate when assets or income contributions are not forthcoming.  It has also been suggested that a trustee should have some ability to be paid for the work undertaken when divisible property or contributions are doubtful and that this money assists a trustee in better performing their duties.
   3. It remains the Inspector-General’s view that unless certain conditions are met (see paragraph 8.6 below), this practice is inappropriate and contrary to bankruptcy law and practice.  A fundamental principle in bankruptcy administration is that a trustee is entitled to be indemnified for their reasonable remuneration and costs from trust money.

   4. It has been recognised by the Courts that a trustee cannot expect to recover all their costs and remuneration in every bankruptcy and that the scale of fees set by a trustee for themselves and their staff reflect this risk.  In the Phillips case^[27], Riethmuller FM said:

      …it must also be borne in mind that undertaking the role of trustee is a function that a trustee embarks upon aware of the inherent risk that he or she may not be remunerated.  If an estate contains no assets that can be realised then the trustee will remain without remuneration, unless creditors are prepared to fund investigations.  Prescribed remuneration rates are higher than the scale fees for similar work carried out in the course of litigation, presumably (at least in part) to recompense trustees for the risk inherent in the function.

      The result is that a lack of remuneration ‘may be an incident of the risk associated with the performance of the trustee’s duties in the period between the sequestration order and the expiry of the 21 days’: see Garrett v Deputy Commissioner of Taxation [2005] FMCA 19 at [34] per Lindsay FM.  It is certainly a well accepted incident of the risk inherent in the performance of the trustee’s duties in assetless estates.

   5. In supporting these conclusions, the Inspector-General does not accept the argument of cost recovery as rationalising the practice of asking the debtor for money where there is a risk of no realisations.
   6. The only circumstances where such a payment might be accepted as valid is where the trustee:
      
      1. has informed the debtor of the income contribution regime and that any other payments or surety is purely voluntary
      2. has informed the debtor of alternative choices of trustee, should the debtor not be prepared to voluntarily make the payment
      3. reports to creditors on the source and basis of the money
      4. does not endeavour to execute legally enforceable contracts concerning the payment and does not pursue the debtor for any payment
      5. takes remuneration in accordance with section Division 60 of the Schedule to the Bankruptcy Act.
   7. This position has been endorsed in the ARITA Code.

   8. Treatment of money paid voluntarily

   9. Voluntary payments that meet the conditions in paragraph 8.6 above made to the trustee by the debtor or by a third party related to the debtor must be banked into the estate account.  If the payments are taken as remuneration, Division 60 of the Schedule relating to approval of remuneration applies and the money attracts the realisations charge.
   10. It has been suggested that the words in subsection 6(1) of the Bankruptcy (Estate Charges) Act 1997 (“the Estate Charges Act”) “received by a person” should be read as “realisations by the trustee” relating to divisible property and contributions.  The Inspector-General does not support this proposition.
   11. The guiding principle in determining liability to pay the charge is whether the relevant amount was “received” by a person mentioned in subsection 6(1) of the Estate Charges Act, and that the amount was received “by the person in that capacity” as required by subsection 8(2) of the Estate Charges Act during the charge period (less certain exclusions).
   12. Accordingly, in considering whether a trustee is liable to pay the charge in relation to a particular receipt, it is necessary to determine whether the amount was received by the person in their capacity as trustee of the estate of a bankrupt under the Bankruptcy Act.^[28]
   13. The Bankruptcy Act and Rules includes a number of machinery provisions relating to the Estate Charges Act.^[29]  The Estate Charges Act and the Bankruptcy Act need to be read together as part of the same scheme for the regulation of bankrupt estates.  Expressions used in the Estate Charges Act ordinarily have the same meanings as in the Bankruptcy Act, subject to a contrary intention.  The Bankruptcy Act and Rules include a number of provisions concerning amounts received by a person in their capacity as trustee of the estate of a bankrupt.
   14. Hence provisions in the Bankruptcy Act and Rules concerning the receipt of money by a person in their capacity as the trustee of a bankrupt estate should be read as referring to the same amounts received by the person in their capacity as trustee of a bankrupt estate under the Estate Charges Act.
   15. It has also been suggested that payments by third parties taken as remuneration pursuant to the Bankruptcy Act can be paid directly to the trustee’s private account or the firm’s account operated by the trustee, thus avoiding the realisations charge.  Subsection 65-5(1) of the Schedule provides that a registered trustee “must pay all money received by the trustee on behalf of, or in relation to, the estate into administration account for the estate”.^[30]  Failure to comply is a strict liability offence with a penalty of 50 penalty units.
   16. Further, trustees should be aware that payments made to them directly (including to their firm account) relating to remuneration could breach the prohibition on deriving profit or advantage from the administration of the estate contained in subsection 60-20(1) of the Schedule.  Failure to comply is a strict liability offence (unless an exception in subsection 65-20(3) of the Schedule applies) with a penalty of 50 penalty units.
   17. Hence the second principle in applying the Estate Charges Act is that the money that must be paid into an administration account and not mixed with other money under the Bankruptcy Act is the same money that for the purposes of the Estate Charges Act is received by the person in their capacity as trustee of the estate of a bankrupt under the Bankruptcy Act, and to which the charge imposed by paragraph 6(1)(a) of the Estate Charges Act applies (subject to any specific exclusion from the charge).
   18. As a corollary, money that does not have to be paid into an administration account, is not subject to the charge imposed by paragraph 6(1)(a) of the Estate Charges Act.
   19. With the exception of the Estate Charges Act subsection 8(2) exclusions, when a trustee receives a compliant voluntary payment from the bankrupt or third party and applies it in payment of remuneration and costs, they receive the money in the capacity as trustee of the estate.  The money must be deposited into the appropriate administration account on behalf of the estate and realisations charge is payable on the money.

9. AFSA’s role

   1. AFSA has a number of key roles concerning remuneration. While there is the option for resolution of disputes concerning remuneration through other means (such as review or litigation), these may be expensive options. Regulatory intervention in disputes can and will occur where considered appropriate.
   2. Section 12 of the Bankruptcy Act provides the Inspector-General with the power to investigate and, where issues of concern arise either during the annual inspection programme or through a complaint or tip-off being made, AFSA will examine the remuneration claimed by reference to the principles stated in this practice direction and the standards in Division 42 of the Rules.
   3. Where breaches of the law (including the Standards), lack of record-keeping or improper handling of money is identified, the trustee will be asked to take remedial action, including any refund of remuneration not properly taken or justified.  This may also lead to counselling or, in serious cases, to referral of potential offences for investigation, litigation and/or disciplinary action being initiated.

Footnotes